Wednesday, October 11, 2017

Kotak Committee Report on corporate governance was not needed - my interview in ET CFO

Q: What are your broad views on the Uday Kotak-led panel report on corporate governance?
AKB: Although the panel has made many important recommendations, which are conceptually sound, I think, this report wasn't needed in the first place. We came upwith the Companies Act in 2013, and then Sebi Listing Obligations and Disclosure Requirements (LODR)Regulations in 2015. And it has been just two years since then that we came again with the new recommendations. The question that arises is that are we really going to bring new regulations so frequently to improve corporate
I believe present laws are enough to improve corporate governance. We should let them stabilise first, and try to make companies apply them in spirit. For this, a change in mind set is extremely important. In absence of that, companies will continue to adopt the 'tick box' approach to corporate governance.
Q: On the Board structure the Kotak Committee recommends a minimum of 6 directors for listed companies? How do you look at this suggestion?
AKB: Usually the average size of the Board in India is between 8-9 directors and therefore for large companies this is not at all an issue. But for smaller companies (bottom 2000 companies) this might be a problem. Their compliance cost will increase.
Q: What do you make of minimum Rs 5 lakh annual remuneration and Rs 20,000-50,000 sitting fees for
independent directors?
AKB: The panel has recommended minimum compensation for top 500 companies. The minimum
remuneration for independent directors is not required. Independent directors, who are accomplished individuals in their own field, are not driven by monetary incentives.The risk is that those who are not accomplished will compromise on independence. I believe, as is the case at present, the board should decide the sitting fees and the commission.
Q: The panel also recommends at least one independent woman director and talks about splitting
the MD/Chairman posts...
AKB: My observation is that the report on board structure and other things are really not important. Because provisions in the Companies Act and Sebi's LODR are enough for improving corporate governance. The panel has recommended that at least one womandirector should be independent, but why? There can be one logic that is if the woman director is related to the promoter, she might carry the opinion of the promoter, and not share her independent views instead. Therefore thebenefit of gender diversity may not come. But we are stretching our assumptions. These are general beliefs. There is no research to say that an independent women director is contributing more than non- executive women
director or executive women director. This doesn't serve much purpose in terms of merits. If the culture in the Board is to allow free discussion and a virtuous cycle is created that is there is mutual trust
between the Board of Directors, then even the executivewoman director will be able to bring her point of view. It all depends on the company's culture and the Board culture. Second, you are again compelling the bottom 2000 companies to appoint someone as woman independentdirector on their Boards when there is already a scarcity of independent directors with right credentials.
Likewise the panel has talked about dividing the position of Chairman and MD but they have not said independent director should be the chairman, they have said nonexecutive director should be the chairman. Now, in the Nifty 50 companies, over 30-35 are run by family businesses and most of them have non-executive chairman, who is either promoter or related to the promoter. In those companies, the CEO and the chairperson positions are separated. But is the CEO independent of the non-executive chairman, the answer is no. Again the control is tilted towards the executive management. The panel has recommended that if the chairman is not an independent director, lead independent director should be appointed. This concept is good. But, the effectiveness depends on the 'independence of the independent director'. Today, in most companies, NRC (Nomination and
Remuneration Committee) is not effective. No independent director is appointed without the tacit approval of the controlling or dominant shareholder. This is unlikely to change unless the mind set of such a
shareholder changes, even if majority of the members of NRC are independent directors, as recommended by the panel.
Q: The panel has emphasized a great deal especially on the role of Independent Directors.
AKB: I believe that independent directors in family run businesses can't improve Board's effectiveness in
oversight function. They improve Board's effectiveness in advisory function. They can check and protect minority shareholders from direct fraud. But they do not engage effectively with management in deciding the strategy and other important issues. It is the promoter who invests most of the family wealth in the company and brings funds in crisis situations by providing personal guarantee. Such a promoter would find it difficult to effectively engage independent directors in decision-making, unless he or she sees value in the same. Hence, a change in mind set is more crucial in improving the effectiveness of boards and independent directors.
Q: The panel also talks about the number of times the Board should meet in a year. How important is this?
AKB: The panel recommends that the Board should meet at least five times in a year. At present, the requirement is four times in a year. Usually, in large companies the Board meets more than four times in a year depending on the issues before it. For small companies, increase in the number of meetings will increase the compliance cost. I think that the current requirement is adequate.

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